III Main Developments in Restrictive Measures

International Monetary Fund
Published Date:
January 1992
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This chapter examines the trends in the main categories of individual restrictions, with special emphasis on developments in Eastern Europe. Appendix II, which summarizes the measures affecting IMF members’ exchange and payments systems in 1989–90, provides considerably more detail. Although the degree of restrictiveness of an exchange and payments system cannot be addressed solely on the basis of the number and direction of measures taken over a certain period, the numerical analysis presented below can provide an overall sense of whether member countries are taking more or less restrictive measures.

Measures Affecting Current Transactions


While responsibility for multilateral trade policy lies primarily with the General Agreement on Tariffs and Trade, the IMF has jurisdiction over restrictions on payments and transfers for current international transactions. Although exchange restrictions can be used to achieve various ends, most are designed to husband foreign exchange resources and to utilize them in accordance with some plan or policy. A comprehensive system of exchange restrictions can take the place—entirely or partly—of an ordinary market for foreign exchange. Instead of exchange being allowed to be bought and sold freely, exchange receipts are channeled into a central pool and distributed to users according to various criteria. The imposition or the tightening of exchange restrictions impedes the free international flow of goods and services and tends to distort relative prices and reduce economic efficiency.

Under Article VIII, Section 2(a) of the IMF’s Articles of Agreement, IMF members may not impose restrictions on payments and transfers for current international transactions without the IMF’s approval. Nevertheless, as a transitional measure, members are permitted, under Article XIV, Section 2, to maintain and adapt to changing circumstances those exchange restrictions in effect on the date on which the country became a member. Under Article XIV, Section 3, members that maintain restrictions under Article XIV must consult with the IMF annually as to their further retention. To date, 70 members have accepted the obligations of Article VIII, of which 5 members accepted during 1989–91,30 compared with 3 members in 1987–88.

The most dramatic changes occurred in Eastern Europe, where a major liberalization of the exchange systems took place as part of fundamental economic reform. In view of the magnitude of these changes, the progress toward elimination of exchange restrictions was far greater in 1989–90 than in 1987–88, and perhaps not fully borne out simply by the number of individual measures introduced. Given the far-reaching nature of the transformation—from a system of central planning toward a market economy—the following section will consider the sequence of reforms introduced in Eastern Europe in some detail and, briefly, place them in the context of the overall reform being sought.

Eastern Europe

While some countries, notably Hungary and Yugoslavia (before the recent civil war), had already achieved a measure of reform, for most of the countries (Bulgaria, Czechoslovakia, the former German Democratic Republic, Poland, and Romania), the starting point was a centrally planned economy. While the particular circumstances varied, the hall-marks of such an economy were such that virtually all means of production were owned and controlled by the state except for a small proportion of agricultural land. Detailed planning of practically all economic activity was the responsibility of a central planning authority. Prices were strictly regulated and did not play an allocative role. In the external sector, foreign trade was managed exclusively by state-owned and -controlled specialized agencies, while all transactions in foreign currencies were conducted by a single state-owned bank at exchange rates that typically were not allowed to reflect world market prices on the domestic economy.

Against this background, the process of correcting earlier relative price distortions in order to move toward full convertibility of the currency usually involved substantial depreciation of the exchange rate and often the unification of previously separate exchange rates or the elimination of price equalization schemes. In Romania, for instance, the introduction of foreign exchange auctions in February 1991 was preceded by a cumulative devaluation of the commercial rate of about 32 percent in 1990. In Czechoslovakia, the Government that took office in December 1989 devalued and unified the commercial and noncommercial exchange rates. In Poland, the earlier policy of frequent devaluations was succeeded at the start of 1990 by a substantial devaluation with the rate then pegged to the U.S. dollar as an anchor against inflation by tying the prices of tradable goods to world levels as well as by influencing expectations. In Bulgaria, where reform started later, a reform program involving the lifting of exchange and trade restrictions began in February 1991 and included a floating of the exchange rate, which initially depreciated sharply, with the decline partially reversed by a subsequent appreciation. Finally, in the former German Democratic Republic, convertibility was achieved in July 1990 through economic and monetary union with the Federal Republic of Germany.

Equally fundamental was the dismantling of the state monopoly on foreign trade transactions that was accompanied by the abolition of the state monopoly on the provision of foreign exchange. In Czechoslovakia, the foreign trade law was amended in early 1990 to allow all economic units to export their own products and to import inputs for their own production. This was preceded, in January 1989, by a new foreign exchange retention scheme that enabled enterprises to import from their retained export proceeds without any foreign exchange license. In Romania, similar changes were introduced in February 1990, when new laws opened up all economic activity, including foreign trade, to private units, which were allowed to self-finance their imports with up to 50 percent of export proceeds. In Poland, where some reform had already taken place, restrictions on the participation of enterprises in foreign trade were liberalized further. In early 1990, a complex system of access to foreign exchange through auctions and retained export earnings was replaced by unrestricted access to foreign exchange at the official rate from the banking system to pay for all merchandise imports, property rights, and attendant services.

In Hungary, all economic units were allowed to engage in foreign trade (after being registered with the Ministry of Trade) from January 1988. During 1989 and 1990, however, further progress was made in reducing restrictions on exports and imports (for which there are exemption lists), and, in March 1989, as a step toward decentralization of foreign exchange operations, commercial banks were authorized to act as intermediaries between the National Bank of Hungary and domestic customers for commercial foreign exchange transactions. Finally, in Yugoslavia, as part of the reform process initiated by the Government in March 1989, foreign exchange became freely available to carry out payments and transfers for current international transactions. On January 1, 1990, internal convertibility was introduced, and residents were free to convert unlimited amounts of dinar into foreign exchange and vice versa upon demand. In the latter part of 1990, however, as balance of payments pressures intensified, the Yugoslav authorities again limited the scope of convertibility.

A number of other restrictions on access to foreign exchange, not necessarily related to trade transactions, were also reduced. In Romania, for instance, in January 1990, the requirement that all foreign exchange be kept in bank accounts was eliminated, as were the restrictions on the use of foreign exchange from those accounts that began to yield interest payable in foreign exchange at 4 percent a year. Also, in Poland, the nonregulated parallel market was liberalized in March 1989. Foreign exchange banks and licensed foreign exchange bureaus were authorized to buy foreign exchange from resident and nonresident individuals (but not enterprises) and to sell it to residents.

For current invisibles, common practice has been to treat transactions in services associated with trade as trade transactions for the purposes of exchange control. This happened, for instance, in Poland and Romania. Elsewhere, foreign exchange for travel abroad became more freely available. Travel allowances were introduced or modified in Czechoslovakia, Hungary, Poland, and Romania. Even in countries that subsequently reduced the allowances because of balance of payments pressures—for example, Hungary in November 1989—overall reform was firmly oriented toward liberalization: the right to travel and accompanying allowances usually replaced a system in which, although legal provision for travel allowances had existed, no, or few, allowances had been granted in practice.

Finally, in March 1990, as part of the liberalization of foreign investment restrictions, Romania allowed foreign currency accounts from which dividends and some of the initial capital contribution could be paid. At the same time, the requirement that Romanians working in international organizations or joint ventures had to repatriate part of their foreign exchange earnings was reduced or eliminated. Similarly, in Poland, a general permit was issued in mid-January 1990 to allow additional payments and transfers for current invisible and some capital transactions.

Measures Affecting Import Payments

The trends in the main categories of individual restrictions are examined below. In some cases, reference may already have been made to the measures introduced as part of a more comprehensive reform of the exchange system. As noted above, Appendix II, which summarizes the measures affecting IMF members’ exchange and payments systems in 198990, provides considerably more detail.

Advance Import Deposits

Under advance deposit schemes, a country’s authorities require importers to deposit, usually in local currency, with the monetary authorities or commercial banks a specified proportion of the value of an import transaction. In most cases, the deposits are required when application is made for an import license or when an import letter of credit is opened. They are retained for a specified period (usually not exceeding the life of the import transaction) and can often be used to make the import payment; in some cases, the deposit rates can exceed the value of the underlying transaction.31 In general, deposit schemes have been introduced to reduce import demand directly and, frequently, indirectly by restraining liquidity creation, which has often been excessive. They have also been used to restrain or favor particular imports, to frustrate the effects of liberal import-licensing procedures, or to finance current government expenditure.

At the end of 1990, 21 countries maintained advance import deposit schemes compared with 22 in 1988. During 1989–90, 16 countries took 37 measures related to advance import deposits, of which 26 were in the direction of liberalization (Chart 9).32 Moreover, all but 2 countries employing restrictive measures also undertook more liberal measures and, indeed, sometimes reversed the earlier measures. In Bangladesh, for instance, advance import deposits of 100 percent and 50 percent for commercial and industrial imports, respectively, under the Secondary Exchange Market (SEM) scheme were introduced in February 1990. But in February/March, these rates were reduced to 50 percent and 25 percent, respectively and, in November 1990, the advance import deposit requirement for industrial imports under the SEM scheme was abolished. Similarly, in Peru, a non-interest-bearing advance import deposit requirement imposed on certain imports in January 1990 was rescinded in August.

Chart 9.Developing Countries: Advance Import Deposits, 1985–901

(Number of measures)

Sources: Appendix II; and IMF, AREAER,1986, 1987, 1988.

1These trends do not purport to indicate the economic significance of the measures taken over the period; however, they can provide an overall sense of whether member countries are taking more or less restrictive measures.

Measures Directly Affecting the Allocation of Foreign Exchange

As noted above, an important feature of the exchange system in a number of countries is direct government involvement in the allocation of foreign exchange. One of the more frequently used methods is the individual allocation of exchange, whereby requests for allocation of exchange are examined individually and granted in the form of a license, on the basis of the merit of each transaction. Another method of allocating foreign exchange involves determining the aggregate amount of exchange that will be available during a period and distributing it on a nonselective basis, such as the first-come, first-served principle. In addition to the measures mentioned above in the context of wholesale reform of the foreign exchange system, a number of countries undertook partial measures. For example, Trinidad and Tobago removed 12 product groups from the foreign exchange allocation system for imports in September 1989; in Colombia, imports of goods not subject to a prior import license are exempted from the official foreign exchange budget. Liberalization of official foreign exchange restrictions also took place in Malawi, Mozambique, Sudan, and the Republic of Yemen. In the Dominican Republic, the requirement that all foreign exchange transactions be effected through the Central Bank was temporarily suspended in October 1989 because of pressures in the foreign exchange markets, and commercial banks were authorized to make payments for imports with foreign exchange obtained outside the official system. In Argentina, on the other hand, restrictions were tightened considerably in mid-1989 as economic conditions deteriorated. In May, controls on import payments were introduced leading to arrears to suppliers, and, in June, payments abroad exceeding $1,000 were suspended. In July, however, these restrictions were lifted, and access to official foreign exchange for import payments and interest on private debt was fully restored. In addition, in December 1989, a freely determined exchange rate was introduced, and all controls on current and capital account transactions, except for the obligation to surrender export proceeds, were eliminated.

Measures Affecting Letters of Credit

Of 12 countries that implemented measures related to payments for imports through letters of credit, 9 moved in the direction of liberalization while 3 tightened restrictions. Examples of the former are (1) the lowering and abolition of margin requirements against letters of credit in Nepal and the Republic of Yemen, respectively, in early 1989; (2) the exemption from a prior approval requirement of letters of credit for essential imports in Somalia; and (3) the abolition, in a series of measures undertaken during 1989, of limits on maturity dates for letters of credit in Guatemala.

Administrative Measures

Such measures can take a variety of forms but are often introduced as an alternative method of control on the allocation of foreign exchange. Among the industrial countries, on January 1, 1990, Ireland suspended the requirement of prior approval from the Central Bank to make payments to nonresidents to pay for purchases of goods abroad for resale abroad. Norway abolished restrictions on import payments. Among developing countries, Algeria introduced new requirements for prior approval of financing arrangements for imports financed with credits of more than 90 days. Similarly, in Nepal, all import payments to India in Indian rupees had to be documented. Administrative requirements were relaxed in Western Samoa and Zambia.

Trade-Related Measures

As noted above, while trade measures are not the focus of this study,33 major reforms of the trading system have implications for the allocation of foreign exchange and are often accompanied by reforms of the exchange system. As well as occurring in Eastern Europe, such reforms occurred in Liberia, where liberalization of the exchange system was accompanied by major trade reform, including abolition of the import-licensing system. Significant liberalization of trade was also undertaken in Guinea-Bissau, Malta, and Sierra Leone.

Exports and Export Proceeds

In total, 72 liberalizing measures were taken by developing countries in 1989–90, compared with 58 such measures in 1987–88 (Chart 10). Five developing countries took liberalizing measures relating to export licenses in 1989–90. Costa Rica, Mali, and Sierra Leone eliminated the requirement for licenses (except for gold and diamond exporters), while Sudan and Zambia substantially simplified the existing system in 1989–90.

Chart 10.Developing Countries: Exports and Export Proceeds, 1985–901

(Number of measures)

Sources: Appendix II; and IMF, AREAER,1986, 1987, 1988.

1These trends do not purport to indicate the economic significance of the measures taken over the period; however, they can provide an overall sense of whether member countries are taking more or less restrictive measures.

2 From 1988, the data exclude quantitative trade measures.

In the face of continuing balance of payments pressures, several developing countries resorted to fiscal and other incentives to promote exports. Bangladesh introduced special incentives for toys, luggage, fashion goods, electronic items, and leather goods and offered a cash subsidy of 10–20 percent for exports of jute goods; India introduced a scheme providing for compensation of unrebated indirect taxes not refundable under the Duty Drawback System while extending the scope of that system; Kenya made an additional 451 goods eligible to receive export compensation; Nepal introduced a 25 percent cash subsidy on jute hessian exports and incentives of between 10 percent and 35 percent for additional products; Pakistan increased income tax exemptions; and South Africa introduced an incentive scheme for exporters based on the local product content and movements in the real effective exchange rate.

In the opposite direction, Venezuela reduced the scope of fiscal credits for exports (in the form of a negotiable bond that could be used for tax payments); Bolivia, Poland (where, as noted above, a complex system of export incentives was abolished), Uruguay, and Yugoslavia did likewise.

Eight developing countries undertook measures relating to credit facilities for exports. Having modified the system of subsidized credits for nontraditional exports several times earlier in the year, Peru abolished the system in August 1990. Turkey also undertook a variety of credit measures in 1989 and 1990, including the establishment of Turkish Eximbank facilities for exports to Algeria and the former U.S.S.R. of $150 million and $100 million, respectively. Argentina, Malta, and Myanmar eliminated export prefinancing or export promotion schemes, while El Salvador eliminated guarantee deposit requirements for a variety of exports.

The trend in other export incentives, principally connected with the treatment of foreign exchange earnings, was in the direction of liberalization. Twenty-two countries, including one industrial country (Italy), undertook measures that affected requirements on foreign exchange allowed to be retained by exporters. Of these, 17 countries introduced liberalizing measures. Italy, for example, allowed residents to retain foreign exchange receipts from the sale of goods and services in accounts without any time limit; previously, such balances had had to be used for particular transactions or sold to authorized banks within 120 days. The other measures involved either an extension of the period in which export proceeds had to be surrendered or a decrease in the percentage of the receipts to be surrendered or a reduction in the scope of exports covered by such surrender schemes. Three countries (Chile, Ghana, and Madagascar) liberalized measures related to the repatriation of export proceeds. Finally, Honduras expanded the scope of its export incentive system of transferable certificates of foreign exchange, while in 1989 and 1990, Peru revised the system covering foreign exchange proceeds from exports in a series of measures that were largely oriented toward liberalization.

Current Invisible Transactions

Restrictions on payments and transfers related to international service transactions are diverse and affect a number of balance of payments categories, such as travel, medical expenses, study abroad, subscriptions, advertising, insurance premiums, transport and freight, banking and financial services, family remittances, and investment income, including profit remittances and interest payments on foreign debt.

Broadly speaking, exchange measures are more widely applied to service transactions than to merchandise trade, largely because it is more difficult to control the underlying service transaction. Methods of control imposed on the physical movement of goods have less applicability to services. As a result, services are monitored and controlled and taxed in many countries through the financial system at the payments or transfer stage. Consequently, many service restrictions—probably the majority in developing countries—take the form of exchange restrictions (and often multiple currency practices) subject to approval under Article VIII or maintained under Article XIV.

The financial character of most service transactions also means that the payments and transfers can constitute an important vehicle for capital transfers. Because the liberalization of such transfers requires strong supporting measures to bring the exchange rate and interest rates to appropriate levels, a number of countries have delayed liberalization of services, which is evident in the continuing widespread maintenance of restrictions by developing countries. However, one technique for liberalizing current invisibles while retaining capital restrictions has involved introducing indicative limits whereby payments and transfers beyond the limit are approved if the applicant can document that they are for bona fide current international transactions. Such an approach has permitted a number of countries to accept the full obligations of the IMF’s Article VIII, Sections 2, 3, and 4 regarding avoidance of restrictions on payments and transfers for current international transactions, multiple currency practices, and discriminatory currency arrangements while retaining capital controls consistent with Article VI, Section 3.

Conversely, because the industrial countries enjoy a far greater degree of liberalization of capital restrictions, they have less need for restrictions on current invisibles to assist capital controls. At the beginning of 1989, only five industrial countries (Greece, Iceland, Ireland, Italy, and Portugal) maintained restrictions on service transactions compared with almost two thirds of all developing countries. During 1989–90, Greece and Portugal relaxed these restrictions: Greece raised the foreign exchange allowance for personal travel in both 1989 and 1990, while Portugal relaxed foreign exchange restrictions on tourists in 1989 as well as limits on payments to countries with which it did not maintain special clearing arrangements. Also in 1989, Italy raised the limits on checks that could be written against domestic banks by residents traveling abroad.

The developing countries, on balance, continued the trend toward liberalization, implementing 67 measures in 1989–90, compared with 96 measures in 1987–88 (Chart 11). The most common measure toward liberalization was a relaxation of restrictions on travel allowances, with 23 developing countries increasing foreign exchange availability for this purpose in 1989–90, among them, Bangladesh (for business travel by exporters), Brazil, Burundi, Colombia, Cyprus, El Salvador, Israel, Lesotho, Mauritius, Morocco, Nepal, Pakistan, Romania, Sierra Leone, Somalia, Thailand, and Turkey. Only 5 countries reduced travel allowances: Bangladesh (for personal travel), Hungary, Poland, Sri Lanka, and Sudan. Of these, Poland and Hungary tightened restrictions on travel allowances in the context of a wholesale liberalization of their international trade and payments systems. In Hungary, the tightening of restrictions followed a major relaxation of travel regulations in 1988 that gave every Hungarian citizen the right to a passport valid for five years of unrestricted travel. This basic reform was accompanied by an increase in foreign exchange allowances for travel, which were tightened considerably in 1989 as the balance of payments on service transactions deteriorated.

Chart 11.Developing Countries: Current Invisibles, 1985–901

(Number of measures)

Sources: Appendix II; and IMF, AREAER,1986, 1987, 1988.

1These trends do not purport to indicate the economic significance of the measures taken over the period; however, they can provide an overall sense of whether member countries are taking more or less restrictive measures.

The other main categories to be liberalized were family and workers’ remittances and transfers of profits and dividends. In the former category, restrictions were relaxed in Bangladesh, Burundi, Sri Lanka, and Zambia, while limits were imposed in Madagascar. In the latter category, Ghana, Honduras, Madagascar, and Morocco all relaxed restrictions, while Israel reduced value-added tax (VAT) to zero on payments for all services, with the exception of tourism.

By contrast, Brazil increased restrictions on debt-service payments. In a series of measures taken between July 1989 and January 1990, interest payments accrued on medium- and long-term external debt owed to nonresident commercial banks were made subject to retention at the Central Bank as were remittances of profits and dividends. Dividends of foreign companies were allowed to be remitted abroad only after being retained at the Central Bank for 120 days. In June 1990, however, it was announced that remittances of profits, dividends, and royalties would be freed gradually.

Other developing countries that experienced debt-servicing difficulties during the period intensified exchange restrictions by accumulating arrears. The question of arrears will be considered in greater detail later in this chapter.

Measures Affecting Capital Transfers


International capital transactions have increasingly come to be conducted within a more liberal regulatory framework in industrial and developing countries alike. Most large industrial countries had substantially liberalized capital movements of inflows and outflows by the late 1970s, especially with respect to portfolio and direct investment. The move toward liberalization continued in the 1980s in the areas of interbank transactions, foreign currency accounts, and the provision of financial credits. With the EC’s deadline for a unified capital market approaching (see below), these liberalization efforts accelerated sharply in 1989. The momentum was maintained in 1990, leaving most industrial countries with a virtually fully liberalized system for capital account transactions at the beginning of the 1990s (Chart 12). In developing countries, 101 liberalization measures were introduced in 1989–90 compared with 90 measures in 1987–88. The momentum toward liberalization was especially evident in Latin American countries, where policies aimed at attracting foreign direct and portfolio investment and other private capital flows were adopted, often accompanied by IMF-supported programs, as the external financing constraints facing indebted developing countries have necessitated greater reliance on private capital inflows. Few new measures were introduced to tighten capital controls even though many countries faced balance of payments difficulties.

Chart 12.Capital Controls in Industrial and Developing Countries, 1985–901

(Number of measures)

Sources: Appendix II; and IMF, AREAER, 1986, 1987, 1988.

1These measures do not purport to indicate the economic significance of the measures taken over the period; however, they can provide an overall sense of whether member countries are taking more or less restrictive measures.

The trend toward a more liberal environment for capital account transactions seems to be increasingly the result of policymakers’ growing recognition of the substantial economic benefits that derive from a more open and integrated world economy, although it also stems from a broad interplay of other factors. For example, trade liberalizations in many service industries, in particular the financial industry, have necessitated accompanying liberalizations of capital account transactions, and technological advances have made it more difficult to impose enforceable administrative barriers to some types of capital transaction. Also, with the adoption of comprehensive adjustment programs and greater reliance on market forces, policymakers in many developing countries have become convinced that an open capital account can be maintained as long as appropriate domestic policies are pursued. Finally, the need to attract foreign capital to help countries overcome debt-servicing problems has led policymakers to ease restrictions on capital inflows and to promote, in particular, non-debt-creating inflows.

While Article VI, Section 3 allows members to regulate capital movements without the approval of the IMF, the IMF’s surveillance over exchange rate policies under Article IV, Section 3(a) takes into account developments with respect to capital restrictions. In particular, certain changes in capital restrictions may indicate a balance of payments problem, which may prompt a discussion between the IMF and a member. Many countries that had relied on stringent controls to prevent capital flight in the face of unrealistic exchange rates found these to be inefficient and even counterproductive.

In contrast to the review of restrictions on current international transactions, the review of measures affecting capital flows includes regulations aimed at controlling the underlying transaction. Often such measures are introduced under the auspices of the exchange control law and other foreign exchange legislation, although they would more appropriately be part of the general investment law, special mining legislation, or banking supervision or insurance law.

Recent Developments in Industrial Countries

In 1989 and 1990, the industrial countries made further significant progress in liberalizing capital market transactions. In terms of the number of measures undertaken, the liberalization of capital markets in 1989 was the highest in three years, with 14 industrial countries undertaking 31 liberalization measures; in 1990, the momentum was sustained, with 11 countries implementing 33 liberalization measures. In contrast, during 1989–90, just 4 countries (Iceland, Italy, Portugal, and Spain), each introducing 1 measure, tightened capital restrictions.

Among the non-European industrial countries, the United States allowed banks to accept foreign currency deposits as of the end of 1989, and, in August 1989, New Zealand increased the minimum value of most direct investments requiring government consent and permitted financial institutions, as of January 1990, to deal in foreign exchange without authorization. Within the framework of the Canada-United States Free Trade Agreement, Canada agreed to increase the monetary thresholds under which review and approval by an agency of the Government of Canada would not be required for most acquisitions of Canadian businesses by U.S. investors. Canada also removed, for U.S. investors, the limit of a maximum of 25 percent foreign ownership that applies to Canadian financial institutions. Japan enacted a series of measures easing the regulatory framework for commercial banks’ foreign exchange dealings and restrictions on portfolio investment; the measures included easing ceilings on monthly transactions between offshore and onshore markets, abolishing limits on sales of bonds issued in foreign markets to domestic investors, and abolishing all restrictions on maturities and issuance eligibility standards on yen-denominated bonds in foreign markets by nonresidents.

Among the EC countries, Denmark, Germany, the Netherlands, and the United Kingdom had already completely liberalized their capital account transactions by early 1989. By mid-1990, Belgium-Luxembourg, France, and Italy had also removed remaining capital restrictions, leaving only Greece, Ireland, Portugal, and Spain with such restrictions. Belgium-Luxembourg achieved full liberalization in March 1990 when it abolished the two-tier exchange rate system under which financial transactions were effected at a separate exchange rate. By the time it was abolished, the dual exchange rate system had long since ceased to diffuse pressures on the exchange rate; for most of 1989, the discrepancy between the official and the financial rate averaged less than 0.2 percent and was virtually zero in early 1990. In March 1989, France lifted all exchange restrictions that applied to capital transactions by banks and enterprises engaged in international trade. By extending the applicability to all other residents, France’s system also became fully liberalized in January 1990. After having devalued the lira by 3.7 percent and accepted the narrower margins within the ERM in January 1990, Italy freed short-term capital movements in January 1990 and abolished the surrender requirement of foreign exchange to the banking system. In May 1990, residents were permitted to open and maintain deposits abroad, thus completing the liberalization of all capital movements. The remaining four EC countries, which continue to have capital account restrictions, have all made progress toward their elimination. Greece fully liberalized direct investments by its residents in other EC countries in July 1989, and, in January 1990, Ireland removed all restrictions on purchases of foreign securities with maturities exceeding two years and eased restrictions on the sale of securities issued by the EC and affiliated institutions. During 1989, Portugal increased various limits beyond which prior approval was needed for medium- and long-term capital transactions, direct investment in other EC and Organization for Economic Cooperation and Development (OECD) countries, and portfolio investment in foreign securities. Spain permitted residents to maintain accounts in ECUs at authorized banks and permitted residents to purchase, without restriction, securities denominated in pesetas that were issued by international organizations and foreign governments.

Recent liberalization of capital movements within the EC has been guided by the Capital Liberalization Directive of 1988. The directive, which was adopted by the EC Council of Ministers in July 1988, called for the removal of all remaining capital controls within two years in most EC countries. However, Ireland and Spain have been authorized to maintain certain restrictions until the end of 1992,34 and Greece and Portugal until the end of 1992 but with the possibility of extending the authorization until the end of 1995. The directive requires that the liberalization include all short-term capital transactions (that is, transactions with an original maturity of one year or less) regardless of whether these transactions are related to any underlying current account transactions. The directive does, however, contain a safeguard mechanism whereby a country is allowed to impose restrictions on most capital movements during a period not to exceed six months if excessive short-term capital movements threaten the stability of the exchange rate and monetary policies.

The directive has an important bearing on capital market liberalizations worldwide in that liberalization is extended not only to EC residents but to non-EC residents as well. Certain exceptions apply, however; for example, member countries will continue to be able to exclude direct investments by residents in particular non-EC countries.

In December 1989, the EC adopted the Second Banking Directive. Together with the Capital Liberalization Directive, the fully implemented Second Banking Directive will allow, by January 1993, for the unrestricted provision of a broad range of financial services throughout the Community. The directive calls for abolishing the remaining barriers to the establishment of foreign bank subsidiaries in member countries as well as to the provision of cross-border financial services. The directive builds on the principle of home country control, whereby a financial institution is allowed to provide the same kinds of services throughout the Community while subjecting itself solely to the banking supervision authorities in the country that issued its license. The Second Banking Directive also has important implications for the worldwide liberalization of the provision of financial services insofar as it allows subsidiaries of banks from third countries to benefit fully from liberalization within the EC.

The collaboration between the EC and EFTA has intensified in recent years following the “Luxembourg Declaration” of 1984, which envisaged the creation of a dynamic European Economic Area encompassing the two trading blocks.35 Capital market liberalizations within EFTA countries have thus been quite similar to those in EC countries. Switzerland has long provided a liberal regulatory framework for capital transactions. Austria liberalized many restrictions on long-term capital transactions in 1989 and lifted most restrictions on short-term capital transactions in 1990. The only remaining restrictions concern the issuance of domestic securities on foreign capital markets and foreign securities on the domestic capital markets, the acquisition of real estate by nonresidents, and some areas of foreign direct investments. In July 1989, Sweden allowed nonresidents to invest in Swedish bonds and money market instruments denominated in Swedish kronor and to make deposits in Swedish kronor in interest-bearing accounts in Swedish banks. Remaining restrictions include deposits made by Swedish residents in foreign banks and payments of life insurance premiums to foreign insurance companies. During 1989, Norway enacted a series of measures—including expanded rights for nonresidents to purchase local-currency-denominated bonds and for residents to obtain foreign currency loans—which by the end of the year had left it with a virtually fully liberalized system for the corporate and institutional sectors; in July 1990, almost all remaining restrictions, including those affecting individuals, were abolished. In Finland, regulations on outward and inward capital transfers were broadly liberalized in early 1989, with restrictions remaining in place for financial institutions and housing and real estate companies. In 1990, the liberalizations were expanded to include the issuing by residents of markka-denominated bonds abroad and by nonresidents in Finland; at the same time, the prior authorization requirement of share issues by Finnish companies abroad was abolished. In Iceland, taxes on foreign borrowing were eliminated in 1989. The following year, foreign exchange controls on long-term capital transactions were liberalized, and residents were permitted to purchase real estate and foreign securities and undertake direct foreign investments subject to certain limits.

In May 1989, the OECD Council adopted an amended Code of Liberalization of Capital Movements. The code already covered most medium- and longer-term financial operations, including those in securities (bonds and shares), commercial and financial credits, personal capital movements, and direct investment (including establishment) in all sectors. The amendments extended the code’s coverage to virtually all capital movements, including (1) money market operations, including operations in securities and in the interbank market; (2) short-term financial credits and loans; (3) foreign exchange operations, including spot and forward transactions; (4) operation of deposit accounts in domestic and foreign currency; (5) swaps, options, futures, and other innovative financial instruments; (6) financial backup facilities; (7) commercial credits of more than five years; and (8) financial credits and loans taken up abroad by nonfinancial resident enterprises.

Recent Developments in Developing Countries

The overall trend among developing countries during 1989–90, as in past years, was overwhelmingly in the direction of liberalization. More than 50 countries introduced nearly 100 measures of liberalization, whereas only 13 countries introduced 17 restrictive measures. However, in spite of the significant progress achieved in recent years and in contrast to industrial countries, developing countries have not, in general, embraced the idea of fully liberalized capital flows. Furthermore, liberalization measures in developing countries are almost exclusively undertaken unilaterally—often in the context of comprehensive adjustment programs with financial support from the IMF—to achieve country-specific objectives.

Several developing countries introduced a series of liberalization measures on international commercial banking activities during 1989–90, while only two countries resorted to tightening such regulations. Argentina lifted all exchange restrictions on capital account transactions. Bangladesh permitted local banks to extend local currency loans to foreign-owned companies operating within the country. Brazil permitted transfers abroad of proceeds from sales of property and inheritance up to $300,000. The Dominican Republic and El Salvador increased the scope of permissible foreign exchange dealings of commercial banks, and Tunisia allowed offshore banks to accept local-currency-denominated deposits. Romania introduced a foreign exchange retention account program, whereby up to 50 percent of export proceeds could be deposited, and further liberalized the provisions for foreign exchange accounts and eliminated restrictions on the use of foreign exchange from these accounts. Also, Israel liberalized the export credit scheme, allowing exporters to obtain financing outside the commercial banking sector, and Colombia increased the ceilings applicable to foreign currency deposits with domestic commercial banks and financial corporations. Of the two countries that introduced tightening measures, China, in early 1989, made all foreign commercial borrowing subject to prior approval and placed restrictions on the use of short-term borrowing. Turkey lowered the limits under which the exchange rate could be freely negotiated between authorized institutions and their customers.

Whereas a large and diverse group of developing countries liberalized their regulations concerning nonresidents’ accounts and residents’ foreign exchange accounts, only four countries introduced tighter regulations. Several—Cyprus, Egypt, Israel, and Mauritius—liberalized would-be emigrants’ rights to transfer assets abroad. Turkey liberalized residents’ access to international lending and borrowing, while Algeria expanded the right of individuals to open foreign currency accounts to include all residents, and Morocco first lowered and then eliminated the minimum initial deposits required for non-resident Moroccans to open convertible local currency accounts. In Sierra Leone, the range of currencies in which domestic economic agents can hold foreign exchange deposits was expanded from only the U.S. dollar to any convertible currency, and restrictions on remittances of nonresidents’ income were eliminated in Ghana. Peru removed controls on residents’ foreign exchange transactions and on resident foreign exchange accounts. Among the four countries that introduced tighter regulations, Poland and Turkey curtailed residents’ access to hold foreign currency deposits; Yugoslavia temporarily limited transfers abroad from such accounts in late 1990; and Pakistan required government permission for certain transfers of Pakistani securities between nonresidents.

With respect to liberalization of portfolio investments during 1989–90, six countries (India, Madagascar, Mauritania, Morocco, Panama, and Turkey) liberalized inward investments. Whereas India liberalized foreign investments in all hotel-related securities for nonresident Indians, Mauritania implemented a new investment code that guarantees transfers abroad of dividends and profits, and Morocco lifted a general 49 percent limit for the allowable share of foreign participation in local enterprises in most sectors. Madagascar allowed enterprises in the Industrial Free Zone to borrow abroad, and Panama announced new incentives for foreign investment in export processing zones. Turkey broadened the access for nonresidents to purchase domestic securities. In contrast, only two countries liberalized outward investment. Israeli residents were permitted to invest abroad up to 10 percent of their portfolio of financial assets with their own funds, and the rights of foreign residents to repatriate proceeds from liquidation of investment were broadened. Korea abolished requirements concerning the credit standing of residents investing abroad, lowered the minimum equity investment ratio, and abolished the minimum interest rate for long-term loans. It also increased the limits on foreign exchange holdings for investment in foreign securities of domestic securities firms. Whereas Mauritius lowered capital transfer taxes, Turkey provided new tax benefits for foreign investment funds, and Chile increased the access to the official exchange market for repatriation abroad of imported capital and earned profits. Only Gabon tightened its regulations, by requiring foreign companies investing in Gabon to offer shares for purchase by local residents for an amount equivalent to at least 10 percent of the companies’ capital.

Not surprisingly, most reforms of capital controls in developing countries during 1989–90 were related to foreign direct investment, as inward foreign direct investment has been increasingly recognized as an important vehicle for economic development. Most of the measures liberalized inward investment. The push for liberalization was embraced by a broad spectrum of countries, ranging from low-income African countries and middle-income heavily indebted Latin American countries to the fast-growing dynamic economies of Southeast Asia. Among African countries, Ethiopia instituted a new investment code, with no restriction on size, type, and sector of activity permitted for foreign investments; furthermore, the code guaranteed the right of profit and dividend remittances and proceeds from the sale of assets. Bolivia approved a new law that put domestic and foreign investors on an equal footing. Mauritania and Zimbabwe also strengthened the rights of foreign investors to repatriate profits and dividends, whereas Togo’s new investment code emphasized a streamlining of tax exemption privileges. Two heavily indebted countries, Peru and Venezuela, introduced new schemes enabling debt conversions: in Peru new legislation allowed the conversion of donated public debt for use in development projects; and, in Venezuela, the debt-equity conversion regulations were amended. Venezuela also substantially liberalized restrictions on new direct foreign investments as did Algeria, Belize, and Mexico. India amended its investment policy by allowing automatic approval of foreign investments with equity shares of up to 40 percent; the Indian Government made it easier for nonresident Indians to invest in the hotel industry. Korea fully liberalized foreign direct investments in six manufacturing sectors as well as in wholesale distribution business of toiletries and cosmetics; it also raised the administrative ceiling under which automatic approval is guaranteed. Ecuador established a new export-processing zone, while China, Ethiopia, and Poland liberalized their joint-venture laws. Colombia and Somalia introduced new banking laws: in Colombia, the new law permitted foreign equity participation of up to 49 percent (up to 100 percent since January 1991), whereas the Somalian law allowed nonresidents to establish their own financial institutions. Four countries tightened regulations concerning foreign direct investments. Turkey introduced new approval procedures for investments abroad by residents, and Malaysia lowered the allowable new foreign capital equity participation in certain manufacturing entities to 60 percent from 100 percent. Finally, in accordance with the Common Monetary Area agreement between the two countries, Lesotho joined South Africa in prohibiting nonresidents from purchasing farms and residential properties with financial rand.

Restrictions Leading to External Payments Arrears

The IMF’s data on members’ external payments arrears include arrears that have been caused by exchange restrictions on current payments or transfers, as well as arrears on financial obligations of which the obligor is the government.36

In view of the adverse consequences for the country that maintains arrears and for the international payments system, the elimination or substantial reduction of payments arrears in an orderly manner and without any differentiation in the settlement of arrears between other members constitutes an important element of members’ economic programs supported by the use of IMF resources.37 Moreover, the incurrence of arrears and the policies of members that give rise to them have been subject to careful scrutiny in the context of regular Article IV consultations with the IMF. The IMF has also consistently followed the practice of not approving, under Article VIII, Section 2(a) of its Articles of Agreement, exchange restrictions evidenced by arrears on current international payments, except when a satisfactory program for the elimination of arrears is in place.

After declining by SDR 7 billion in 1987 from a peak of SDR 36 billion in 1986, the external payments arrears of IMF members are estimated to have increased significantly in 1988 and 1989, to SDR 43 billion and SDR 55 billion, respectively. In 1990, the amount of arrears is estimated to have increased further to SDR 63 billion, although the number of countries experiencing arrears declined from 53 in 1988 to 49 in 1990.38 The following countries eliminated their arrears in 1989–90: Bolivia, El Salvador, The Gambia, Ghana, Guyana, Madagascar, Mali, Mauritania, and the Philippines. As of the end of 1990, the countries with the largest arrears outstanding were Brazil, Egypt, and Peru. The country with the biggest increase in arrears since 1988 was Brazil, which had eliminated its arrears in 1988 but owed SDR 9.5 billion in 1990.

Fifteen of the 49 countries that had arrears at the end of 1990 also had IMF-supported adjustment programs at that time. Four of these programs provided for elimination of the payments arrears in 1991 through a combination of rescheduling and cash payments.


Cyprus, Swaziland, Thailand, Tonga, and Turkey.


Advance import deposit requirements constitute exchange restrictions under Article VIII, Section 2(a) if they are a precondition for the use or availability of foreign exchange to pay for imports. They can also constitute a multiple currency practice if their terms (remuneration, proportion, and period of deposit) increase the cost of foreign exchange by more than 2 percent.


During 1987–88, 34 measures were taken, of which 24 were in the direction of liberalization.


See Kelly and Landell-Mills (forthcoming).


Spain has already removed most capital restrictions ahead of the EC directive schedule.


Current plans envisage that the accord will be ratified by national parliaments in 1992. On these plans, the EEA could be in place by January 1, 1993, the same date as the scheduled introduction of the internal market in the EC.


Payments arrears are evidence of an exchange restriction under the IMF’s Article VIII, Section 2(a), or Article XIV, Section 2, when the authorities of a country are responsible for undue delays in approving applications or in meeting bona fide requests for foreign exchange for payments and transfers for current international transactions as defined in Article XXX(d) on the basis of criteria adopted by the IMF, or distinction has been made between exchange restrictions and defaults (that is, nonpayment of debt for other reasons). Accordingly, when a government or a government entity whose financial operations form part of the central government’s budgetary process fails to meet an external payments obligation, the resulting arrears are considered as evidence of defaults by the government rather than exchange restrictions. Similarly, arrears incurred by governments participating in a common central bank are treated as defaults. Although these distinctions are relevant for the purposes of Article VIII and XIV, in the context of the IMF’s policies on the uses of its resources, defaults and other forms of arrears involving current and capital payments are viewed as having the same broad macroeconomic character and consequences, and are therefore treated in the same manner. All references to payments arrears in this section relate to arrears as defined in the broadest sense.


In November 1986, the Executive Board undertook a review of the implementation of IMF policies on members’ external payments arrears, the major conclusions of which were summarized in the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER), 1987. The conclusions of earlier reviews of IMF policies were summarized in AREAER, 1983 and 1985.


As of the end of 1990, the following 49 members maintained external payments arrears: Algeria, Angola, Antigua and Barbuda, Argentina, Benin, Brazil, Burkina Faso, Cameroon, Central African Republic, Comoros, Congo, Costa Rica, Côote d’Ivoire, Dominican Republic, Ecuador, Egypt, Equatorial Guinea, Gabon, Grenada, Guatemala, Guinea, Guinea-Bissau, Haiti, Honduras, Jamaica, Jordan, Liberia, Mozambique, Myanmar, Nicaragua, Niger, Nigeria, Panama, Paraguay, Peru, Poland, St. Lucia, Sao Tome and Principe, Senegal, Sierra Leone, Somalia, Sudan, Suriname, Syria, Tanzania, Uganda, Viet Nam, Zaïre, and Zambia.

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